Question

Assume there is a recessionary gap of $200 billion, and that the government has decided to engage in expansionary fiscal policy to eliminate this recessionary gap. How much must the government spend to get the economy to the long-run equilibrium if the marginal propensity to consume is 0.6

Answer 1

The government spending to get the economy to the long-run equilibrium if the marginal propensity to consume is 0.6 is $80 billion.

First step is to find the multiplier using this formula

Multiplier = 1/(1-MPC)

Let plug in the formula

Multiplier=1(1-0.6)

Multiplier=1/0.4

Multiplier=2.5

Second step is to calculate government spending using this formula

Government spending=Recessionary gap /Multiplier

Let plug in the formula

Government spending=$200 billion/2.5

Government spending=$80 billion

Inconclusion the government spending to get the economy to the long-run equilibrium if the marginal propensity to consume is 0.6 is $80 billion.

Learn more about marginal propensity here:https://brainly.com/question/20533807